UPDATES! What's new for the 2020 tax-return season?
Ready or not, tax-return reporting has changed yet again for the 2020 tax-return season. Meanwhile, the impact of the 2018 changes in tax rates and brackets continues.
Alert: The COVID-19 pandemic of 2020 has prompted the postponement of the April 15 tax-return deadline to July 15, both for filing and for the payment of any tax owed with your return. In other words, Tax Day 2020 is July 15. The IRS has issued FAQs to answer questions taxpayers may have about the extension of the deadline. States that have income taxes are expected to make similar provisions for their state tax returns. Be sure to check with your state's tax agency/revenue department.
For employees with 2019 income from stock compensation or sales of company stock, this FAQ explains all of the changes you need to know for 2019 tax returns, to be filed by April 15, 2020.
The IRS Form 1040 tax return, condensed in 2018, has been revised again for the 2019 tax year. The numbered schedules (supplementary forms) of Form 1040 have been reduced to three (Schedules 1, 2, 3).
A new tax return, IRS Form 1040-SR ("US Tax Return For Seniors"), is available for taxpayers born before January 2, 1955. It has a large, easy-to-read font and includes a standard-deduction chart so that these taxpayers don't need to access the instructions, though Schedule A is still available for itemizing deductions.
- On the 2019 IRS Form 1040, total capital gain or loss on Schedule D is once again entered directly on IRS Form 1040, not on Schedule 1 as it was last year. For details, see our commentary on this below and in the myStockOptions.com Blog.
- The AMT calculation total on Form 6251 is entered on a different line of Schedule 2.
- The tax legislation that took effect in 2018 (the Tax Cuts & Jobs Act) continues to affect the tax rates that apply to stock compensation.
These changes are detailed below.
Revised Form 1040
In 2018, the IRS condensed Form 1040 and introduced additional schedules that funnel information to Form 1040. The 2019 IRS Form 1040 has 24 lines. Major recent changes to know about include:
1. Compensation. Stock compensation, along with salary income reported on Form W-2, is entered on Line 1 of Form 1040.
2. Other income. In certain circumstances, you may need to use Schedule 1 to report any employee stock compensation income not reported on Form W-2. You use Schedule 1 only as a last resort in the following situation: your company mistakenly omits the income from your W-2, you cannot get a corrected Form W-2c, and you don't file Form 4852 as a substitute for Form W-2. If that is the case, you report the income as "Other income" on Line 8 of Schedule 1. (This reporting changed from Line 21 for 2018 returns to Line 8 for 2019 returns.)
3. Capital gain or loss. If you sold shares during the 2019 tax year, you enter each sale on Form 8949 and report the totals on Schedule D. The capital gain or loss on Schedule D is directly reported on Line 6 of Form 1040. This is different from last year's reporting, in which the total capital gain or loss was entered on Schedule 1 rather than Form 1040.
4. Alternative minimum tax (AMT). A concern for anyone with incentive stock options (ISOs), the AMT is no longer directly reported on Form 1040 from the calculation on Form 6251. Instead, AMT from the Form 6251 calculation now goes into Line 1 of Schedule 2 ("Tax").
This is a change from last year's reporting (which was on Line 45). Attach Form 6251 to Schedule 2. The totals from Part I of this schedule go into the Line 12b totals of Form 1040 (previously Line 11).
Form 6251 has not changed since last year, when its lines were revised. The spread at ISO exercise is reported on Line 2i.
When the ISO stock that triggered the AMT is sold, the difference from the ordinary tax is reported on Line 2k.
The AMT credit that is generated for an ISO exercise that triggers the AMT is recouped through Form 8801, as it was in the past. The amount from Line 25 of Form 8801 now goes into Schedule 3 ("Non-Refundable Credits") on Line 6 (check box b).
The totals from Part I of Schedule 3 go into Line 13b of Form 1040.
Rules For Cost-Basis Reporting
For stock sales, there is no change in the IRS rules on how the cost-basis information is reported on Form 1099-B. For grants made in 2014 and later years, brokers are prohibited from including equity compensation income (which appears on Form W-2) in the cost basis reported on Form 1099-B. This creates confusion and complications with the reporting of stock sales from stock compensation on IRS Form 8949 and Schedule D.
For guidance on the tax-return reporting for sales of shares acquired through stock compensation, including annotated diagrams of Form 8949 and Schedule D, see the section Reporting Company Stock Sales in this website's Tax Center.
Additional Tax-Reporting Resources
The Tax Center has a section that gathers our popular annotated diagrams of Form W-2. These can help you make sense of Form W-2 (which companies issue in January) when the reporting on the form includes income you received from stock options, restricted stock/RSUs, or employee stock purchase plans.
If you exercised ISOs in 2019, your company will send you Form 3921. If you purchased shares through an ESPP during the year, your company will send you Form 3922. Employers send these forms in January. This website has articles and FAQs with annotated diagrams of Form 3921 and Form 3922 that can help you understand these documents.
For details on the changes brought in 2018 by the Tax Cuts & Jobs Act (tax reform), including those that affect tax rates on stock compensation, see the related article elsewhere on this website.
If you participate in a nonqualified deferred compensation (NQDC) plan, see our sibling website myNQDC.com for educational guidance on tax-return reporting.